An extremist, not a fanatic

July 31, 2008

High-powered incentives can be bad for team spirit. That’s one implication of evidence that England’s hitherto decent team spirit seems to be falling apart: Richard Hobson describes “signs of discord” with the team, with Flintoff and Sidebottom both having pops at Panesar.It might be no accident that this sort of thing has begun soon after the ECB agreed to play a series of 20/20 games against a Stanford All-stars XI, with each player on the winning side getting $1m.The result of this has been to vastly increase the pay-off to being selected for the England team; anyone in the 20/20 side has a good chance of making up to £2.5m; there’ll be five 20/20 games. Each England player is, therefore, in a “winner-take-all” tournament right now - because being just in the 20/20 team brings (a chance of) great wealth whilst being just out of it brings nothing.So, when a bowler sees a fielder do badly, or a batsman sees his innings end because his partner is run out, he’s minded to think: “that idiot is costing me a fortune by jeopardizing my chances of getting into the 20/20 side.” So team spirit suffers.The question is: is this efficient? It is, if the heightened incentives spur players on to do better in the test - if, say, Flintoff’s anger at those run-outs energized him to bowl out Graeme Smith, or if Sidebottom’s anger at Panesar prompts Monty to try harder in the field.But there are three ways in which the incentives might weaken performance in the test:1. High-powered incentives themselves can lead to worse performance if people crack under pressure; this is the Yerkes-Dodson effect. 2. As players compete for limited places in the 20/20 side they might regard team-mates not as colleagues, but as rivals for the prize; they might turn into Geoff Boycott, without the redeeming feature of Boycott’s ability.3. Weaker team spirit might directly reduce performance, if players are less inclined to try hard for people they no longer regard as friends, or if the less supportive dressing-room atmosphere increases nervousness. These issues, of course, apply directly to less important matters than cricket. They suggest that massive pay for chief executives can, in some cases, do more harm than good to company performance.

July 30, 2008

If people don’t learn the difference between right and wrong, it is not just that they become anti-social. They don’t learn the fundamental lesson that there is only one person responsible for what they do — and that is themselves.Nothing is wrong, and nothing is anyone’s fault; it is always someone else’s. Don’t blame me for what I do; it’s society’s fault.

But no-one denies that it is individuals who make choices. The question is: why do people choose to become fat, or drunk, or criminals?Browne seems to think it is because of a lack of moral fibre. But this is a tautology, and a useless one at that. It gives us no clue about how to change their behaviour. To do this, we must recognize that people respond to - if they do at all - to costs and benefits, incentives. This is not a left-wing point, unless you think Gary Becker (pdf) or David Friedman are left-wingers. So, people commit crime because the expected benefits of doing so exceed the expected costs. And this leads naturally to the view - which is well supported by quasi-experimental (pdf)evidence - that poverty is one cause of crime. If you’ve got a good job, going to prison is expensive. If you’re on the dole, it’s less so. If you’re well educated, you can get money easily, by working. If you’re badly educated, it’s harder to get rich honestly so at the margin you’ll be more likely to become dishonest. This is why ugly people are more likely to be criminals, and why prisons are full of illiterates, the mentally ill and addicts and why inequality causes crime.Peer pressure is also part of the cost-benefit framework. If our friends and neighbours are criminals, we are more likely to be criminals ourselves, because one cost of crime - being shunned by one’s peers - no longer exists. This approach, I stress, need not necessarily have any left-wing policy implications. You could argue that although poverty does tend to raise crime, the costs of cutting poverty - in terms of disincentive effects on labour supply - outweigh the benefits; crime is a price worth paying for the inequality we enjoy so much. Or you could argue that this approach justifies vicious punishments, as only these are so costly as to deter crime.Insofar as Browne is making an intelligent point, it can be integrated into this framework. If people could internalize high moral standards, they would be less likely to commit crime, because the cost of doing so - a feeling of shame - would be greater. It’s undoubtedly true that some people are wrong’uns and commit crime even though they have economic advantages: just think of, say, members of the Bullingdon club trashing restaurants. Alternatively, condemnation from others might raise the costs of crime, and so reduce it. But this merely raises empirical questions; how can we instil a sense of right and wrong into people, and at what cost? By how much would crime fall if we could do so? Does moral censure from the likes of Cameron or Browne really reduce crime - or might it even raise it by making crime feel cooler? And Browne doesn’t produce any empirical evidence here. Which leads me to a suspicion. The issue here is not left vs. right. It’s science vs ego. Some of us, on seeing anti-social behaviour wonder: what caused that person to do that? Others, like Browne, see such behaviour merely as an opportunity to stroke their own egos by imputing to themselves a sense of moral superiority.

July 29, 2008

Do leaders matter? This is the broader question raised by the issue of whether Gordon Brown should step down. A slim majority of voters think Labour’s fortunes would improve if he were to go. I find this implausible. If Labour were to get a new leader, would many voters really think?:

I was worried by high taxes, recession, the destruction of our civil liberties, mismanagement in every government department and pointless and unwinnable wars. But now that nice Mr Miliband is in charge, I’ll vote Labour.

This is not my only reason for thinking it doesn’t much matter who leads Labour.First, the economic literature is unclear on whether leaders can contribute to organizations. Three claims that they do seem unconvincing:1. This new paper shows that basketball coaches can make a significant different to team performance, with teams performing “substantially better” if their coach was an outstanding player 20 years previously. This result, however, probably doesn’t even translate into proper sports, let alone politics. As Arrigo Sacchi said: “If you want to be a jockey, being a retired racehorse is not necessarily an advantage.”2. This paper (pdf) shows that Danish companies who’s chief executives suddenly died suffered, on average, an 11% fall in profits in the following two years, suggesting CEOs do make a difference. The trouble is, it’s unclear why profits fall. Sure, it could be because the CEO was a strong leader. But it could also be because his death causes increased office politics as potential successors jockey for position.3. This paper (pdf) shows that national leaders can make a huge contribution to economic growth; for example, Mao held back the Chinese economy disastrously. But this result seems to only apply to autocratic leaders, not democratic ones.So, the hypothesis that leaders matter generally is not a strong one.This matters, because any new Labour leader is at a huge disadvantage relative to leaders of other organizations.A key way in which leaders can change organizations is by changing personnel - be it coaches picking the right players, or Jack Welch’s 20-70-10 system, or Jim Collins’ “getting the right people on the bus.” But this lever is largely unavailable to a new Labour leader. No-one seriously thinks a mere Cabinet reshuffle - whoever does it - will revive the party’s fortunes. It’s not as if a new leader could recruit David Davis.But let’s ignore all this, and grant that the “great man” theory of history is right, and that leaders can make a difference. This still leaves two questions.One is: wouldn’t it be a remarkable coincidence if a great man is around just when we need one? As John Prescott pointed out, no potential successor “has anywhere near the skills and experience” for the job.Secondly, even if someone could grow (quickly) into the job, what makes us think the party could spot that person? The party pretty much all thought Brown would make a good PM just a few months ago. If they were so wrong then, why should they get it right this time? Talent is scarce - but so is the ability to spot it.So, let’s be clear. New Labour’s problem is not that the wrong arse is in the PM’s chair. It’s that the party is intellectually as well as financially bankrupt. It’ll take a lot more than a new leader to fix this.

July 28, 2008

Our nation faces a grave peril. I speak not of recession, terrorism or soaring fuel prices, but of something really serious - Carol Vorderman’s departure from Countdown.This is not what I started working from home for.There’s an important point of economics here - it raises the question: who has power within a company?Carol’s bosses think its them. They are alleged to have told her: “Countdown easily survived without Richard [Whiteley]; it can easily survive without you."But this is by no means certain. Vast numbers of people, I suspect (me included) watch Countdown purely because of Carol - men for obvious reasons and women so they can mutter about mutton and lamb. Without Carol, Countdown is less interesting than computer scrabble.This means it’s Carol who has genuine power. It’s her, not her employers, who attract viewers - just as Angelina Jolie (who's much less attractive than Carol) or George Clooney can pull in audiences for even mediocre films. Sacking Carol, then, jeopardizes the entire programme - a threat magnified by the fact that the owner of the programme format is threatening to take it away.All of which means that a company’s formal owners or managers might not have as much actual power as they pretend. Power can instead be owned by key employees - stars who attract audiences, salesmen who bring in clients, researchers who come up with unique products, and so on.The classic example of this happened to Saatchi & Saatchi in the mid-90s. Shareholders objected to Maurice Saatchi’s high pay and, in effect, booted him out. But he took colleagues and clients with him, costing the old firm a fortune. Saatchi’s shareholders thought they had power. But in fact they didn’t - Saatchi had it.All of which raises two questions. One is about the point of firms. Standard Coasean theory tells us that firms exist because there are occasions when power - top-down organization - is more efficient than market contracting. But what if managers don’t have the power over employees that they think they have?The other is about who should own firms. Common sense says ownership - and therefore power - should reside in those who have made the most important investment in an asset, as these have the biggest incentive to maximize its value. But in some cases, the most important investment is human capital: Countdown might be worthless without Carol. In which case, shouldn’t it be key employees who own the firm - as is common in law partnerships for example - rather than external shareholders or bosses?This classic paper (pdf) by Luigi Zingales discusses these issues.* Should I ever meet Ms Vorderman, I‘ll tell her: “If I appear on Countdown, I‘ll ask for just two vowels.”“Two vowels?” she‘ll reply.“Yes - just U and I together.”How could she resist?

July 25, 2008

Chris Giles and Anatole Kaletsky have both called for the government to introduce a new set of rules for fiscal policy, now the old ones are torn up. What they don’t fully address is the question: why, exactly, do we need such rules?We need them because the obvious restraints upon government - markets and voters - aren’t working.Back in the 60s and 70s, big government borrowing was punished by financial markets. Any hint that the state would borrow too much led to rising gilt yields - and hence higher borrowing costs for companies - and pressure on the pound. For this reason, in the 50s and 60s government’s had to stick to a form of Brown’s golden rule - and in the 70s they learnt the costs of failing to do so.But in globalized markets, this restraint no longer applies. Yield spreads between 10 year gilts and their US or German counterparts are lower now than at the start of the month, suggesting financial markets couldn’t give a monkey’s about the abandonment of the old fiscal rules.However, voters should give a monkey‘s. Chris says the new fiscal framework

should foster budgetary sustainability and intergenerational equity, so one generation does not live the life of Riley and leave problems for its children to clear up.

Which raises the question: why do we need external rules to do this? Why can’t the electorate do it? Younger voters should see that big borrowing is merely deferred taxation, and punish governments for imposing it. And older voters who care about their children and grandchildren should also punish governments.So why don’t they? One possibility is that our electoral system is just too clumsy to permit them to express their discontent; we are only ever offered a choice of job-lots of policies, not individual ones.Another possibility is that, for all our drooling and drivelling, we as a nation don’t actually care about our children. Whichever it is, let’s be clear. If we need fiscal rules, it is only because of moral and/or political failings. But are technocratic constraints really an adequate substitute for adequate political structures or more sophisticated moral sensibilities?

July 24, 2008

It’s a cliché that people adapt. This new paper shed interesting light upon this. It finds that people do indeed fully adapt to both marriage and the birth of a child. They get happier as these events draw nearer, but less happy afterwards. Two years after marriage, people are just as happy as they were when single. And two years after the birth of a child, they are (on average) less happy than before.This implies that - in terms of the impact upon life satisfaction - the monetary value of a child is low. The authors estimate that the birth of a child has the same effect upon happiness as a A$18,300 (£8800) windfall.But the death of a child is very different. Its immediate negative impact upon happiness is 2.4 times as great as the positive impact of a birth. And people don’t fully adapt to bereavement as they do to a birth. As a result, the monetary value of a bereavement is 10 times that of a birth.People aren’t fungible. In terms of happiness, a new-born child is poor compensation for the death of one.This suggests that children convey huge endowment effects (or divestiture aversion or status quo bias) upon their parents; they might not value them much whilst they are alive, but miss them when they are gone.Speaking as a non-parent, I suspect this is irrational. It could be an example of the optimism bias. Parents think their dead child would have grown up to be an exemplar of virtue and achievement rather than - as probabilities suggest - just another mediocrity; victims of knife crime generally seem to be popular talented boys who would have gone out of their way to help anyone - which defies the laws of probability.You might think it crass to mention this. Which raises the question: why is it socially acceptable - and even popular - to attack some irrationalities, such as religion, but not others, such as parents’ attitudes to their children?But then, there is another possible interpretation - that there’s something flawed about this sort of happiness research. But what exactly?

July 23, 2008

Mayor Carcetti might be right. In The Wire, he’s cutting police spending in order to protect the education budget. This might make sense even in terms of reducing crime, at least in the long run*. This new paper estimates that increasing high school enrolment is a more cost-effective way to reduce crime than longer prison sentences.This is because longer prison sentences have little deterrent effect, whereas more educated people are less likely to turn to crime; in the US crime rates are fives times as high among high school drop-outs as among high school graduates.This is not the only way in which education might cut crime. Another way is simply that if kids are in school they are not burgling houses; when schools close for teacher training, property crime rises (but violent crime falls).Also, a paper in the latest Economic Journal (early version here) shows that raising the school leaving age reduces the chances of teenage girls becoming pregnant; the “incarceration effect” (girls don’t want to get pregnant whilst still at school) outweighs the bike shed effect. If teenage parents are more likely to raise criminals than older parents, this could reduce crime in the very long run.You might read this as an argument for raising the school leaving age to 18. However, a more liberal alternative is to pay low-income students to stay on at school, as educational maintenance allowances do.Strangely, though, the Tories have been opposed to these. It couldn’t be that bashing the poor is a higher priority than genuinely cutting crime, could it?* I dunno if this proves true in Baltimore; we've only seen ep 1 of series 5 here in England.

July 22, 2008

James Purnell says the long-term unemployed “will be required to work full-time or undertake full-time work-related activity in return for their benefits.” (par 2.18 here).This raises several questions. Isn’t this an abuse of language? I had thought that if you work, the money you get in return is wages. And if you have to work 40 hours a week to get Job Seekers Allowance of £60.50, you’re paid £1.50 an hour. How is this consistent with the principle of a minimum wage?But there’s a deeper question. Purnell could have sold a similar policy differently. He could have spoken thus:

We know that the unemployed are generally significantly unhappier (pdf) than those in work. We intend to put an end to this, by offering every person who has been out of work for two years the opportunity to do meaningful work improving their local communities. This will not just lift them out of poverty, as the minimum wage and tax credits offer a higher income than out-of-work benefits. It will raise their self-esteem, end the isolation and loneliness that contributes so much to the misery of being jobless and - perhaps - act as a gateway to better jobs.Such work is so much better than the dole that the long-term unemployed, being the best judges of their own interests, will freely choose it. There‘s no need therefore for compulsion.

So, why did Purnell not say this?It can’t be because this policy is more expensive than his actual one which, as I said, will cost the taxpayer money.It could be that he thinks the long-term unemployed are actually working in the black economy, and wants to compel them into the “legitimate” economy. Or perhaps he doesn’t trust the unemployed to perceive their own interests, and so feels the need to compel them. Or maybe he's more concerned to hand over taxpayers' cash to companies than to the poor. But there’s a nastier possibility. As Justin says, this is about stigmatizing the unemployed, by lumping them in with criminals doing community service. In this respect, for all the New Labour drivel about “modernization” what’s going on here is something centuries old - treating poverty as moral failure. Here’s C.B.Macpherson describing 17th century attitudes to poverty relief:

The Puritan doctrine of the poor, treating poverty as a mark of moral shortcoming, added moral obloquy to the political disregard in which the poor had always been held. The poor might deserve to be helped, but it must be done from a superior moral footing. Objects of solicitude or pity or scorn, and sometimes of fear, the poor were not full members of a moral community. (The political theory of possessive individualism, p226-7)

July 21, 2008

Everyone knows that the rich are rarely deficient in self-esteem. However, it’s not just wealth that causes self-esteem. It’s also the case that high self-esteem causes wealth. This new paper estimates that a one-standard deviation above-average level of self-esteem causes 3.7% higher earnings, even controlling for education and cognitive ability, as measured by AFQT scores.Why might self-esteem raise earnings? One possibility is that we take people at their own estimation, so folk with high self-love are more likely to impress at job interviews. As Adam Smith said:

The frequent, and often wonderful, success of the most ignorant quacks and imposters, both civil and religious, sufficiently demonstrate how easily the multitude are imposed upon by the most extravagant and groundless pretensions. (Theory of Moral Sentiments, VI.iii.27)

The other possibility is that self-esteem is a genuinely useful attribute, as it causes people to put in more effort. Here’s Smith again:

Great success in the world, great authority over the sentiments and opinions of mankind, have very seldom been acquired without some degree of this excessive self-admiration. The most splendid characters, the men who have performed the most illustrious actions, who have brought about the greatest revolutions, both in the situations and opinions of mankind; the most successful warriors, the greatest statesmen and legislators, the eloquent founders and leaders of the most numerous and most successful sects and parties; have many of them been, not more distinguished for their very great merit, than for a degree of presumption and self-admiration altogether disproportioned even to that very great merit. This presumption was, perhaps, necessary, not only to prompt them to undertakings which a more sober mind would never have thought of, but to command the submission and obedience of their followers to support them in such undertakings. (TMS, VI.iii.28)

All this has two implications. One is for schools and parents. It might be a good idea to inculcate self-esteem in children, by praising rather than punishing them.The other is for the nature of rationality. Irrational beliefs - self-admiration disproportioned even to very great merit - can have beneficial effects.

July 20, 2008

Louise Bagshawe repeats what is becoming quite a common theme in the Westminster village - that David Miliband is not acting like the next Labour leader. There might be a good reason for this - there’s not much point being next Labour leader. If I were Miliband, I’d be thinking thusly:Forget all that pish about the great man theory of history. The key to great success in politics - as in the media or music - lies not so much in having huge ability, but in being the right person at the right time. Our four most successful prime ministers of the last 100 years - Churchill, Attlee, Thatcher, Blair - all had huge defects as well as merits. They (and in some cases the country) were lucky that they were around at the time when their merits were in demand and their defects could be overlooked.However, the problem is that if I become Labour leader after 2010, I’ll be the wrong man in the wrong time, in at least three senses.1. If the party repeats the pattern of Labour after 79 or the Tories after 97, it’ll retreat into an old leftism - accelerated by the fact that it’ll be disproportionately Blairites who’ll lose their seats in 2010. I’ll be leading a party of the last few dozen people in Britain who think big government is a good idea. The market for intelligent leftist ideas - which is thin even in good times - will be non-existent. 2. The public, or at least floating voters, seem to want someone who is apparently charming rather than apparently intellectual. This’ll change eventually, but not yet.3. The Tories are unlikely to screw up too badly between 2010 and 2014-15. If economic forecasts are right, they’ll have the prevailing wind of an economic upturn. And Cameron’s popularity with the media won’t fade quickly.So, if I become Labour leader, I’ll be like William Hague in 1997-2001. I might be smarter and more principled than my rival, but I’ve no chance of becoming PM. This might have been good enough for Hague, who won the respect of the Westminster village and lots of money from directorships and speaking engagements. But I didn’t come into politics for those motives. I came in to become PM. And the best way to do that is to be Labour’s next leader but one.